The Internet is continuously sprouting as it is becoming available to a wider range of users. The evolution of Internet as a major source of commercial, financial and entertainment portal during mid '90s emerged as a global phenomenon that changed the entire discipline.
In this age, very few or no activity is beyond the scope of the Internet. Nevertheless, as the number of its users is increasing sharply, a number of problems are also arising. For instance, how to control the congestion over the Internet? What pricing mechanism should be used? The list goes on.
In Pakistan, more than 1700 cities are interconnected to share its fruits and there are a number of initiatives being taken to increase the perimeter of information technology. The number of its users has gone up to 1.9 million in 2001-02 from 0.01 millions in 1997-98. Given the development stage of the country, these figures do not look poor.
As far as pricing is concerned, users are getting Internet connections at an average rate of Rs12-15 per hour countrywide, which is not infeasible to afford for middle-income class. However, given the impulsive growth of users and providers, we would likely be entered into a fierce competition of price and quality within the next three to four years.
Internet is a service that is not directly comparable to either telephone or electricity. Take for instance the use of a telephone connection. We pay when we initiate an end-to-end connection by dialling someone's phone number. Now whether we talk or not, since we are using a particular circuit which the other users cannot share unless the line is dropped, we ought to pay for it. Unlike telephone connection, an Internet connection, when established, is free to share information simultaneously among the users at the same time.
Furthermore, in case of telephone, the person who initiates the peer-to-peer connection is liable to pay for the call but in the case of Internet, both terminals pay since both are mutually initiating the connection. Since most of the users are connected via phone line, PTCL charges for using its phone line. Now if we are already paying for the use of PTCL line, why to pay for the Internet? To answer this, consider a user who is connected to Internet via phone line and downloading Economic Survey 2003 which would otherwise have cost him hundreds of rupees.
The payment to PTCL is for using its line; the payment for the Internet is for obtaining the information which cannot be obtained by using any other technique over peer-to-peer phone line easily and cost effectively. Moreover, a hundred users cannot cause excess congestion over the phone network but even a few Internet users would bring a network down to its knees by transferring large high-quality real-time video streams over it.
This congestion would mean less to a home user but not for a high tech multinational whose business runs on it. Therefore this congestion should be dealt accordingly so as to keep the data transfer rates and, thereby, consumer satisfaction appropriate.
The major role of pricing is to facilitate the revelation of the true cost of user's action so as to bring the benefits and costs onto comparable scenario. The mode of pricing the Internet is purely supply-side. Explicitly, the provider decides how much to supply (capacity of bandwidth) and how to charge for it without precisely considering the demand-side, i.e. user preferences. As a result, by paying the similar amount, a logged-on user is free to either surf a particular website or download a 300 MB real-video stream.
By default, a video stream causes much intense congestion than do any other file because they are big and since each file over the Internet is transferred after being divided into data-packets, usually the number of video stream packets is far greater than those of most other file formats and requires greater bandwidth and time for transferring. Ideally, avoiding all technical details, video stream transfer should be priced higher than any other format whether it is an entertainment video or business meeting highlights of Microsoft Corporation (called transaction-based pricing).
Nonetheless, keeping these users off the Internet ultimately means keeping the Internet "low-tech". Furthermore, suppose a method has finally been agreed upon to charge the transfer of video file higher. Would the business meeting highlights and the video of my holiday at home mean the same? And there is no method that can verify that the video file being sent is actually what.
Another pricing mode is usage-based pricing: you are charged according to the bits of data you send/receive. At first, it seems coherent that one pays according to the quantity of information consumed at his par. However, there are two predicaments associated with this pricing mode. First, the implementation cost of acquiring the appropriate technologies is quite high and second, since the mode of transaction (document, video or audio file format) is not known under this pricing mode, yet again the problem of congestion may strike.
A few years ago, the concept of 'responsive pricing' was talked about among western policy-makers. In this sort of pricing, you will pay according to the congestion caused by your interface over the network. Thus if the network is lightly congested, the marginal cost of congestion would be lower and vice versa. However, this method would generally be quite expensive as we need cutting-edge technology to capture the marginal congestion at each user's part.
The simplest method of pricing in the developed countries is perhaps the flat-rate pricing: Every type of user pays the same charges for a specific time period, say, a month (Cable Internet is the best example of it). However, here too, the user is free to use Internet for a whole month as he wants. Intentionally, the user is not only encouraged to use it at maximum for 720 hours to minimize his marginal cost but also unintentionally to bring about excess congestion.
Besides these methods, there is a substantial degree of heterogeneity across time; users may prefer any specific time of the day depending upon their own perception, availability and valuation of information. Congestion might be severe during peak-hours than during off-peak hours. Similarly, two different users can value the same piece of information differently, i.e. heterogeneity across users.
Given these diversified and somehow interconnected pricing mechanisms, pricing and estimating the "real" value of Internet in such circumstances would be the most intense task for the economists. This is the reason why almost after two decades of the publicly available Internet, even the economists of developed nations are unable to price it on generally acceptable grounds notwithstanding the extensive research.
Unfortunately in the context of Pakistan, very less effort has been put to explore such issues with the eye of an economist. The current time-based pricing scheme we are using has no proven efficiency grounds. Since we actually 'use' Internet when any transfer of information takes place at our side, only 'connecting' to the Internet by dialling ISPs number and get connected till the paid-for time strictly does not mean that one is 'using' Internet.
From an economist's perspective, this time-based price is actually to 'establish' one's Internet connection over the network. Information Technology experts know that 'establishing Internet connection' and 'using Internet' are two different notions.
One can easily predict what will happen when the number of Internet users will have enormously been grown in the future and serious network congestion become the everyday problem. Then our policymakers would choose to arbitrarily distort the prices to cope up with the excess demand of internet.
Expressly, we can not suggest disturbing the Internet market by artificially correcting the prices at this early developing stage when there is no real price distortion.But prior to facing these obstructions on ad hoc basis (as we normally do), some earnest homework should have been done. We can incorporate each type of user via using combinations of the given pricing mechanisms and taking into account the transaction type, data transfer and congestion.
In this regard, we can not use just a single, flat price for each user. Rather, the price of using Internet may comprise of four components: (i) A nominal flat fee. to provide Internet connection and to keep it established during the periods when Internet becomes congested; (ii) Usage-based price component; (iii) Transaction-based price component and (iv) Responsive-price component.
After the acquisition of Internet connection and thereby paying the flat-fee, internet user would be charged on both transaction and usage bases during peak hours. This will ensure that the high-tech and corporate users will pay according to their value judgment of the data and time.
While only usage-based pricing would be used during off-peak hours to accommodate low-tech and recreational users. As another advantage, to avoid the transaction-based component of price, the high-tech 'recreational' users would shift towards the off-peak hours leading towards less congestion during valuable times.
Furthermore, responsive prices will be higher for a marginal user during all the day so that each newly-connected user would pay exactly in accordance with the marginal congestion he causes. Now to ensure that each consumer will actually disburse the payments in the end, line-based monitoring (like electricity and telephone services) may be used.
Nevertheless, this is the task of administrative responsibilities to undertake cost-benefit analyses of different available monitoring systems. Although these systems would be quite expensive to implement, they will inevitably be indispensable in the near future to keep the quality, quantity and prices optimal.
There have been done a number of studies in the emerging field of Internet Economics regarding pricing mechanisms, their implementation, and monitoring in various economies. Promptly, this is the task of the economists to verify and analyze the aptness of such models and proposals in the panorama of upcoming future. In addition, responsible authorities should aptly collect and report the appropriate data for Internet usage patterns.
Regrettably, the performance of authorities in this regard is not au fait. For instance, in the Household Integrated Economic Survey (HIES), the household expenditures on Internet, fax, telegraph, telephone, email etc. are treated like peas in a pod. (As clearly written, the household is also being asked to report the expenditure on emailing. Would just emailing someone cost me, without using Internet?). Without the proper and accurate data set, it is merely impossible for economists and policymakers to draw descriptive statistics and to estimate feasible pricing models.
Meanwhile, commercial ISPs should ensure the quality of services through comprehending user valuation and consumption patterns of the Internet so as to properly deciphering their target markets. This practice will not only make their endeavours research-oriented, but also keep them profitably operable in the future ferocious competitive environment.
